Large investors nervous

Commentary: Monday’s intraday reversal is evidence of anxiety

KevinMarder

LOS ANGELES (MarketWatch) — The Wall Street adage, “it takes volume to put stocks up, but stocks can fall of their own weight,” has applied to this advance since its inception six weeks ago.

The six-week market advance off the June 16 lows has been viewed with concern here due to the lack of volume seen in the averages and leaders. The below chart illustrates just one up day in price accompanied by above-average volume.

Such a market will resolve itself in one of two ways. Either the averages will 1) move to the upside on increased volume as more and more institutions believe in the prospect of an acceleration in second-half economic growth, or 2) prices will fall, either of their own weight or as a result of focused institutional liquidation.

The above chart shows two distribution days in the last four sessions. Three to five such days over the course of one or two weeks usually spells caution. The caution was already there in recent columns. This just formalizes it. Another formalization is Friday’s setting of a lower low in the Nasdaq Composite
COMP, -1.94%
defining an intermediate-term downtrend.

As for volume, some market advances show light activity initially, only to pick up steam as the move progresses. For the first four weeks of an advance, a rising market can be given some slack as long as fundamentally-sound stocks are forming and clearing basing patterns on their chart. By the time six, or certainly eight, weeks has passed, ho-hum volume should make an observer suspicious of the integrity of the move. This is what made this participant concerned in mid-October 2007.

When it comes to buying a market leader, it is preferable to insist that any breakout of a base be accompanied by strong volume on the actual day of breakout. One sign that something was amiss: Breakouts in leaders such as Chipotle Mexican Grill
CMG, -0.69%
and Fossil
FOSL, -1.15%
among others, occurred on volume that was lukewarm. Objectively, this suggests a lack of speculative sentiment in the market, not to mention a paucity of institutional interest.

Both are required for a durable intermediate-term advance that is playable from the standpoint of the momentum player.

A typical market advance will feature a group of leading stocks breaking out of basing areas on strong volume. These breakouts will, on average, lead to a 20%-25% advance which is then followed by another phase of sideways movement as buyers and sellers become more evenly balanced.

The current six-week advance has shown only a few of the market’s speculative glamours break out on solid volume and then move up 20%-25%. Among them, Lululemon Athletica
LULU, -1.34%
Fossil (FOSL), Ulta Salon
ULTA, -0.82%
and Virnetx
VHC, -4.11%

Lululemon’s breakout occurred on the third day after the June 16 Nasdaq low, and thus before there was any technical evidence that the average might be ready for a move up. And Virnetx did stage a convincing breakout, following through with a 33%-plus gain. Yet it soon forfeited all of this profit when it returned back to its original launch point.

As one example, Under Armour clears a classic, cup-with-handle base, but on volume 28% above its daily average. Although above average, this is a bit light to provide enough conviction that institutions are behind the stock. A 50% level would have been more convincing. A few days after the breakout, the earnings release is greeted by a sell-off on the largest volume in the stock in over two years.

Elsewhere, precious metals exchange-traded funds have been the preferred vehicles recently. Friday, this participant exited a position in ProShares Ultra Silver
AGQ, -0.43%
the two-times ETF. This decision was based upon a short-term model that issued a sell signal with mild-to-moderate confidence midway through Thursday’s session. The model has historically been accurate 75% of the time. The model says nothing about duration or extent of a signaled move, and often the effect of a signal extends just a few days.

In summation, volume in recent sessions shows a transition from light buying to outright selling by large investors. This is occurring as the breadth of the advance narrows. The speculative sentiment, a certain amount of which is necessary for a durable advance, withers. A few of the liquid glamours, such as Apple
AAPL, -1.92%
stand tall. For the speculator in aggressive growth stocks, it is not necessary to know which way the tide moves from here.

Kevin
Marder

Kevin Marder, a co-founder of MarketWatch.com, is principal of Marder Investment Advisors Corp., and is a contributor to The Gilmo Report (www.gilmoreport.com). He actively trades his own portfolio and those of his clients.

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Kevin
Marder

Kevin Marder, a co-founder of MarketWatch.com, is principal of Marder Investment Advisors Corp., and is a contributor to The Gilmo Report (www.gilmoreport.com). He actively trades his own portfolio and those of his clients.

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